'Education is the engine of mobility:' Fed economist addresses income inequality at Lawrence Tech's Hotelling Lecture

If the United States really wants to do something about income and wealth inequality, and the fact that it’s getting harder to move up the economic ladder, the country will have to do a better job of supporting education.

In a speech in Southfield Friday night, economist Daniel R. Carroll said that when it comes to moving up economically, “Education is the engine of mobility.”

Carroll was at Lawrence Technological University delivering the eighth annual Harold Hotelling Memorial Lecture, an annual highlight of the university’s fall academic calendar. Carroll is an economist in the research department of the Federal Reserve Bank of Cleveland.

Carroll noted that the Oxford English Dictionary defines the American Dream as “the ideal that every U.S. citizen should have an equal opportunity to achieve success and prosperity through hard work, determination, and initiative.”

He then presented statistic after statistic showing that that ideal is less and less likely for Americans, particularly those who start out life at an economic disadvantage.

The share of total income of the top 1 percent of earners is at levels not seen since 1929, falling in the Great Depression and World War II before spiking starting in the 1980s. And growth in incomes of those at the very top – the top 0.5 percent, incomes above $650,000 a year – is five times as fast as everyone else’s since the 1970s.

Carroll emphasized that oft-maligned “1 percenters” are not a monolithic group, and that most people only stay there for a few years in their lives. The group includes top doctors, lawyers, academics, and senior managers. Only the super-rich, the top 0.01 percent, derive most of their income from investment.

This concentration of earnings, Carroll said, has been driven by globalization and the rise of robots and computers, with rote tasks being either shipped to cheap labor markets or taken over by machines. “This places a premium on jobs that work with computers, not against them,” Carroll said. “If you fight with computers, you’re gonna lose.”There’s also an increasing premium in earnings for education. In the early 1990s, the average college graduate could expect to earn a little over twice as much as a high school graduate. Now it’s nearly three times as much.

Also driving concentration, Carroll said, is the fact that people tend to form households with partners of a similar education background. Because most women now work outside the home, that doubles the education premium.

The share of wealth – a household’s net worth, assets minus debts – is even more concentrated. Today, the nation’s 400 richest people have as much wealth as the bottom 47 percent combined. And the wealth share of the bottom 90 percent has fallen from 33 percent in 1989 to 23 percent today.

As for income and wealth mobility, Carroll said the chances of earning more than one’s parents is falling as well – from a 90 percent chance of earning more than one’s parents for those born in 1940 to a 50 percent chance for those born in 1984. Carroll said tax policy is “critical to getting people from the bottom categories to the higher ones,” meaning taxes that don’t fall disproportionately on the lower brackets.

The lack of income and wealth mobility is not uniform across the country, Carroll noted – it’s concentrated in the Deep South and the industrial heartland.

Carroll said studies have shown that factors correlated with increased mobility include lower neighborhood racial segregation, better primary school quality, and lower income inequality.

Carroll also had several recommendations for increasing mobility: Fair access to credit in order to build wealth in housing and small business ownership; investments in K-12 education, particularly for children in low-income neighborhoods; subsidies to encourage specialization in STEM fields; and need-based aid for college.

Carroll also noted that the gender wage gap is falling for younger and better-educated women. But a persistent and huge wealth gap remains for African-American households.

In a question and answer session following the presentation, Carroll talked tax policy, including the tax cut package currently in Congress. He said tax policy shouldn’t penalize the rich or entrepreneurship, since that would have consequences in terms of people willing to take business risk. But he also said there’s scant evidence that trickle-down economics works either. “The research on whether tax cuts cause growth is a mixed bag,” he said. “This certainty you hear about the effect of tax cuts is not borne out in the literature.”

The Harold Hotelling Memorial Lecture Series was founded to honor an esteemed scholar and colleague. Harold Hotelling (1945-2009) joined Lawrence Tech as an associate professor of economics in 1989 and taught courses in business law, business ethics, constitutional law, urban social issues, and law and economics. His life was marked by an unwavering dedication to his family, his church, his students, and his profession.

Lawrence Technological University, www.ltu.edu, is a private university founded in 1932 that offers more than 100 programs through the doctoral level in its Colleges of Architecture and Design, Arts and Sciences, Engineering, and Management. PayScale lists Lawrence Tech among the nation’s top 100 universities for the salaries of its graduates, and U.S. News and World Report lists it in the top tier of best Midwestern universities. Students benefit from small class sizes and a real-world, hands-on, “theory and practice” education with an emphasis on leadership. Activities on Lawrence Tech’s 107-acre campus include more than 60 student organizations and NAIA varsity sports.

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